Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.
But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two companies, representing two different eras of computing in the public mind, will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.
Tale of the tape
Established in 1939, Hewlett-Packard (HPQ 0.65%) is one of the world's largest technology companies, with a presence in more than 170 countries worldwide and a comprehensive portfolio of hardware, software and services. Headquartered in Palo Alto, California, HP is a global leader in consumer printers, and it also has significant presence in PCs, servers, storage devices, networking equipment, and business services. It's diversified from its 1990s role as primarily a PC-maker into several other businesses through a combination of mergers and acquisitions, but few of these moves have provided the company with a clear path to renewed success in the post-PC age. As a result, HP is currently in the midst of a major corporate restructuring, which has thus far pleased investors -- the company's stock has doubled this year.
Founded in 1985, Qualcomm (QCOM +0.24%) is one of the world's leading semiconductor companies. It designs, manufactures and markets digital wireless telecom products and services. Headquartered in San Diego, California, the company has operations in more than 157 countries and territories around the world. Qualcomm was one of the early birds to leverage CDMA technology, used in digital wireless communications equipment and satellite ground stations across North America. Over the past decade, the company has strengthened its product portfolio through a combination of innovations and acquisitions, and it also licenses technology rights from its massive intellectual property portfolio.
|
Statistic |
Hewlett-Packard |
Qualcomm |
|---|---|---|
|
Market cap |
$53.9 billion |
$122.4 billion |
|
P/E ratio |
10.7 |
18.5 |
|
Trailing 12-month profit margin |
(2.8%) |
27.6% |
|
TTM free cash flow margin* |
8.6% |
31.1% |
|
Five-year total return |
(14%) |
125.9% |
Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.
Round one: endurance (dividend-paying streak)
According to Dividata, Qualcomm began paying regular dividends in 2003 after issuing one special dividend in 1998. On the other hand, HP shows why it's long been one of investors' favorite dividend stocks -- it began paying half-yearly dividends in 1965, and switched to quarterly payouts in 1970. A solid 49-year dividend-paying streak lets HP grab the endurance crown without a struggle.
Winner: Hewlett-Packard, 1-0.
Round two: stability (dividend-raising streak)
Qualcomm has been increasing its dividend payouts at least once a year since 2004, which results in a nine-year dividend-raising streak. This is an easy win for Qualcomm over HP, which kept dividends steady for more than a decade, with the exception of one special dividend in 2000. Therefore, HP's dividend-raising streak only started in 2011.
Winner: Qualcomm, 1-1.
Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:
HPQ Dividend Yield (TTM) data by YCharts
Winner: Hewlett-Packard, 2-1.
Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.
HPQ Dividend data by YCharts
Winner: Qualcomm, 2-2.
Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:
HPQ Cash Dividend Payout Ratio (TTM) data by YCharts
Winner: Hewlett-Packard, 3-2.
Bonus round: opportunities and threats
Hewlett-Packard may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.
Hewlett-Packard opportunities
- CEO Meg Whitman's turnaround plan will create a more enterprise-focused business.
- HP introduced several mobile devices powered by Google's Android and Chrome OS.
- HP's new Moonshot low-power servers help customers to minimize infrastructure costs.
- The end of Windows XP support should create higher PC replacement demand in 2014.
- HP's high-performance "ConvergedSystem" and "ConvergedStorage" bank on Big Data trends.
- HP's unveiled a 3-D printing concept, which is expected to be commercialized by mid-2014.
Qualcomm opportunities
- Qualcomm's Snapdragon chips power more smartphones and tablets than any other chip-maker's.
- It's won high-volume designs for Amazon.com's Kindle Fire HDX and Google's Nexus 7.
- Qualcomm's integrated RF360 chip combines all LTE platforms in one family of chips.
- It pioneered the commercialization of fourth-generation (4G) telecom networks and collects royalties from their use.
Hewlett-Packard threats
- Microsoft's Surface Pro competes directly with similar hybrid PCs from HP.
- HP continues to face ongoing commoditization of the laptop and tablet space.
- HP's traditional server sales have declined with the growth of cloud-based computing services.
Qualcomm threats
- Intel rolled out a new line of Atom processors for tablets.
- Intel is also slated to launch Android-only smartphone and tablet processors next year.
- NVIDIA's Tegra 4i LTE-capable chips could gain share in the high-end mobile market.
- Broadcom won Samsung's LTE design with its latest integrated LTE SoCs.
One dividend to rule them all
In this writer's humble opinion, it seems that Qualcomm has a better shot at long-term outperformance. It's long benefited from its technical lead on mobile chip-based communications technologies, and despite fierce competition from Intel and other chip-makers, its leadership role in this segment seems secure. Hewlett-Packard has too much riding on CEO Meg Whitman's turnaround plan, which is effectively trying to reshape the PC maker as a latter-day IBM.
Few companies complete such turnarounds successfully, which is why investors venerate those that do. Make no mistake, the odds are against HP's long-term success in a post-PC age. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!
